Asia State Players Wield Subsidies to Dominate Shipping

Date: Wednesday, December 12, 2018Source: The Wall Street Journal

Ever since nations began moving goods by sea thousands of years ago, shipping has been much more than an instrument of trade. It is a symbol of national power, and for seagoing nations, it must be protected.

This special treatment comes in many forms and remains as enduring as the physical laws that govern maritime operations, despite years of movement toward free trade, privatization and the growth of commercial norms in shipping.

The latest examples of state support are shaping the future of ocean transport and dividing the industry, even as private operators and their big customers talk of moving into an era of greater and more fair competition.

China has made state behemoth Cosco Ocean Shipping Holdings Co. the tip of the spear in its multitrillion-dollar One Belt, One Road initiative to control global supply chains tied to the Chinese economy. South Korea has been pumping billions into its large maritime sector to keep alive the distressed shipping operators and shipbuilders that are pillars of Seoul’s export-focused economy.

State support is a blessing for some operators, but many in the shipping industry believe it is a drag on the global shipping business overall.

It keeps scores of shipping jobs intact and provides financing to private companies to renew their fleets as Western banks pull out of maritime investments. It also has transformed ports in Asia, Africa and Europe into thriving gateways for global trade.

Critics, however, argue state financing also distorts shipping markets, and upends the usual rules of supply and demand. It is one reason there is an estimated 15% more capacity on the water than needed across all ship types, helping keep freight rates below break-even levels and contributing to carrier profit challenges.

Japan complained in November to the World Trade Organization about Seoul’s state funding of local shipbuilders.

The case focuses on the restructuring of South Korea’s Daewoo Shipbuilding & Marine Engineering Co. , a giant yard Tokyo alleges has received more than $10 billion in bailouts since 2015 as it contended with an accounting scandal and a huge drop in orders. The European Union also is considering a separate WTO complaint over Korea’s interventions.

Seoul hasn’t responded to the allegations and instead in late November said it was preparing to provide up to $1.5 billion in loans and guarantees for the country’s shipyards. The package is to back orders for 140 liquefied natural gas-powered vessels over the next six years.

South Korea wants to be at the forefront of new global emissions rules that will force ships to burn cleaner fuels, including LNG, as of Jan. 1, 2020.

The amped-up support for the sector follows the 2016 collapse of Hanjin Shipping Co., which was a top-10 global container line until the state-backed Korea Development Bank pulled the plug on its support for Hanjin’s money-losing operations. The abrupt failure left $14 billion worth of cargo stranded at sea for months and delivered a blow to the Korean maritime industry’s reputation.

In October, Hyundai Merchant Marine Co. , the country’s de facto flag carrier after Hanjin’s collapse, got $5 billion in state funding to order 20 ultralarge container vessels from local yards and invest in container terminals world-wide. The support goes to a carrier that needed a $660 million bailout last year to escape default and controls just 1.8% of global container capacity.

“It may not make sense to many people, but whether it is HMM or the yards, the line from the government is that they need to keep them going,” a senior official from one of HMM’s main creditors said. “Shipping is a pillar of our economy and a source of national pride and that is that.”

Taiwan, meanwhile, also has stepped in to prop up its homegrown shipping sector, sending a $1.9 billion relief package in late 2016 to companies including state-controlled Yang Ming Marine Transport Corp.

“The nation relies on shipping firms to transport goods that come in large quantities, which is key to our economic development,” Wang Kwo-Tsai, the country’s deputy minister of transport, said at the time. “The government has to provide support to the industry before the damage becomes uncontrollable.”

China treats shipping as a central pillar in its plan to expand the country’s position in global trade.

“The traditional financiers have either eliminated or drastically reduced their exposure,” said Soren Skou, chief executive of Denmark’s A.P. Moeller-Maersk A/S, the world’s biggest container operator. “It is more or less impossible to raise significant amounts of finance from European banks, so others like the Chinese have stepped in a big way.”

Industry experts predict China will control around half of the total financing market for the shipping industry by 2025.

China Development Bank provided Cosco a $26 billion credit facility last year to develop its shipping interests, including marine terminals around the world. Over the past decade, Cosco and other Chinese state companies such as China Merchants Group have acquired stakes in 13 ports in Europe, according to the Organization for Economic Cooperation and Development. Those ports handle about 10% of Europe’s shipping container capacity.

Cosco is also looking to acquire some of Hong Kong-based Hutchison Ports’ European assets.

Many private operators say the enormous state backing for such acquisitions distorts shipping markets. In fact, state aid today is an indelible feature of maritime business—it doesn’t disrupt markets, it defines them.